The Hindu Business Line : IDBI, ICICI sharpen claws for bond war

A BOND war appears to be on the horizon between the two premier financial institutions (FIs) of the country, with IDBI set to up the ante with an offer of higher returns on its next Flexibonds issue and ICICI likely to play catch-up with its February issue of Safety Bonds and raise coupons.

While a top IDBI official said that the FI would raise coupons by about 10-25 bps, an ICICI official said that his institution would decide the coupons at the last moment. However, he did not rule out a rate hike.

While IDBI's 11th issue of Flexibonds just closed with an aggregate collection of Rs 310 crore (issue size Rs 250 crore), ICICI's Rs 600-crore Safety Bonds issue closed on Thursday.

According to the ICICI official, the institution would comfortably collect Rs 600 crore.

In the previous Rs 400-crore issue that closed on December 29, it collected Rs 425 crore.

Tax-plan investments usually pick up momentum in the first three months of a calendar year and both FIs are eyeing the last minute rush for tax-saving instruments.

According to the ICICI official, 90 per cent of the money is flowing into the tax-saving option. This has been true of all the previous issues too.

On an average, the institution had been getting 20,000 applications, he added. IDBI too had collected most of the Rs 310 crore under the tax-saving option.

According to the IDBI official, the company had received about 95,000 applications. Both FIs claimed the faith of the retail investor for the success of the issues.

The two bond issues have thrown up some interesting facts about investor behaviour.

To begin with, ICICI's instrument is rated AAA by CARE and LAAA by ICRA Ltd, while IDBI's is rated only AA+ by Crisil and LAA+ by ICRA.

In fact, Moody's, the international rating agency, thinks that ICICI's debt (foreign currency) is better than that of the sovereign's.

Theoretically speaking, ICICI should then command rates better than Government debt. But the issue history tells a different story.

IDBI has managed to raise funds at rates as competitive as ICICI's. In fact, in some options it has managed to beat ICICI.

In regular income bonds, for seven-year maturity, it has offered 9.50 per cent (payable monthly) and 10 per cent (payable yearly), exactly the same rates as ICICI.

It has also offered bonds with 10-year maturity with call options at the end of seven years.

So, in comparison, IDBI has managed to raise funds at finer rates than its better-rated rival.

Retailers who hawk the instruments of both institutions reveal some interesting investor perceptions that have nothing to do with the rating or public relations of either FI.

A retailer who sells bonds of both ICICI and IDBI said, "These bonds are selling because of a lack of other good options. Look at ICICI's issues - all its issues barring the last two were disastrous. Even now, people are investing in these bonds for tax benefits only.''

ICICI's first four issues in the current year were grossly under-subscribed. In fact, the first issue in June did not have the tax-saving benefit option and could manage only Rs 200 crore against an offer of Rs 400 crore.

In comparison, IDBI has not raised any money from the retail bond market throughout the year. Last year too, it had tapped the year-end demand for tax-saving instruments.

Another retailer said that he was not interested in pushing the bonds of either company.

"Both of them are the same. Some people go for IDBI because of the Government backing. In spite of ICICI's apparent balance sheet strength, investors are not confident about the quality of its assets. There is a fair amount of scepticism about ICICI's operations,'' he said.

An analyst with a brokerage house, however, rooted for Safety Bonds saying that looking at the management, ICICI appeared more dynamic and better placed to survive in the current scenario.

The Government ownership and relatively low remuneration structure were a drag on IDBI, and its personnel were not equipped and motivated enough to slug it out in today's marketplace, he added.

"ICICI has been in the market too often. Investors would not want to put all their eggs in one basket and when they saw an opportunity in Flexibonds, which offers the same returns and benefits, they plumped for it. Besides, IDBI is perceived as a Government institution and hence safer than ICICI,'' a broker-retailer said.

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